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Earnings: why IG Group Holdings shares are gaining

Young female business analyst looking at a graph chart while working from home
Image source: Getty Images

The UK stock market might be gaining ground, but the bullishness hasn’t spread to IG Group Holdings (LSE: IGG) shares so far. At least, not until interim results were released Thursday, that is. As I write, the share price is up a couple of percent on the day.

The headline was impressive, boasting “a record half of revenues through diversified growth.”

That’s a 10% rise in total revenue to £519.1m. It led to £24.2m in net interest income, compared to a loss of £0.4m in the first half of the previous year.

But, in the current economic climate, there were downsides to the half too. Total operating costs rose by 25%, to £279.9m. That still leaves a strong operating margin, though. But bottom-line profit before tax declined by 2%. And adjusted earnings per share (EPS) dipped 1.8% to 49.7p.

Cash

The main attraction for me is IG’s healthy cash position, and its returns to shareholders.

The company was already engaged in a £150m share buyback programme, announced in July 2022. Some £114.1m of that was completed in the half. That buyback is now extended by an extra £50m, to £200m.

IG has also lifted its interim dividend, from 12.96p per share to 13.26p. That’s only a 2.3% increase, mind. And it’s not close to keeping up with today’s inflation. Still, considering the financial pressures on customers, it sounds to me like the half went well.

Betting

IG’s business is mainly in contract for difference (CFD) and spread betting. Investors can skip buying and selling shares and just make bets on where the prices are going, which might sound risky. And it is.

In fact, IG’s trading website says, right at the top that “76% of retail investor accounts lose money when trading spread bets and CFDs with this provider.”

That tells me two things. One is that I should steer well clear of gambling on such things. The other is that providing them sounds like a profitable business, and IG Group shares might be good to buy.

Outlook

Analysts appear optimistic. The forecast dividend, while perhaps not growing strongly this year, looks set to yield around 5.6%. And over the next couple of years, City pundits see it rising above 6%.

We’re looking at modest price-to-earnings (P/E) valuations too, of only around nine.

Guidance from the company itself is bullish, with it saying “we are reiterating our medium-term guidance for our business portfolios, targeting 5-7% growth in the Core Markets+ and 25-30% growth in the High Potential Markets per annum.”

Verdict

I think the biggest risk here comes from IG’s market itself. Whether a punter sees it as investing or gambling, it’s very speculative. And right now, spare cash to indulge in the practice is under pressure. Inflation is probably not going to peak as high as feared, but it’s still painful.

So I think I take a more cautious view of the outlook than the company itself. But that dividend yield does look tempting. I’d rate IG Group Holdings a possible buy. But I see more attractive dividends out there, with lower risk.

The post Earnings: why IG Group Holdings shares are gaining appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023